The Week Ahead

Big Deals Return This Week

Billion-dollar deals will make a comeback this week when both Los Angeles County and Cook County, Ill., test the municipal waters, hoping for strong investor demand in the midst of the spring rollover season.

The pair of deals is expected to arrive amid an estimated slate of $8.54 billion in new volume, according to Ipreo LLC and The Bond Buyer. The supply is more than triple last week’s skimpy post-holiday fare, which was revised down to $2.29 billion, according to Thomson Reuters, after originally being pegged at $4 billion. It is also nearly $1 billion more than the revised $7.69 billion that was priced the week of May 24.

The large deals should be well received, given their arrival amid the heavy reinvestment of principal and interest payments that occurs seasonally in June and July, according to Peter ­Delahunt, national institutional sales manager at Raymond James & Associates in New York City.

Delahunt said that even though the supply of new tax-exempt debt “continues to decline as the BAB alternative cannibalizes the longer-dated municipal issuance,” munis are still relatively attractive on a percentage basis to taxables.

Delahunt noted, however, that there are legislative challenges that could temporarily slow Build America Bond issuance.

“The recent headlines regarding issuer compliance impacting a potential loss in federal subsidies has not only pulled some issuers to the sidelines, but may also do the same to investors as it gives them pause in regard to the uncertainty of a significant portion of their coupon payments,” he said.

John Mousseau, a portfolio manager at Cumberland Advisors in Vineland, N.J., which handles nearly $1 billion of municipals among its $1.5 billion of total assets under management, said strong muni credits, such as solid state general obligation bonds, should remain attractive against the backdrop of a weak stock market and the economic crisis in Europe.

The Los Angeles County deal is expected to include $1.5 billion of tax and revenue anticipation notes maturing in 2011 and rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.

Lead underwriter Citi is planning to price the short-term offering on Wednesday or Thursday.

The notes are secured by a pledge of unrestricted taxes, income, revenue, and cash receipts.

Proceeds are being used to help meet fiscal 2010-2011 general fund expenditures, according to the preliminary official statement.

Cook County, on the other hand, will pump an estimated $1.05 billion of GOs,  available as both tax-exempt and taxable securities, into the Midwest market.

Morgan Stanley is expected to price the county’s largest tranche — $400.2 million of GO refunding bonds in Series 2010 A — on Wednesday with ratings of Aa2 from Moody’s and AA from Standard & Poor’s and Fitch.

Additionally, the county will sell two separate series of taxable debt on Thursday, the first being $331.8 million of taxable GO BABs scheduled for pricing by Loop Capital Markets and structured as Series 2010E.

There will also be $322.3 million of traditional taxable GO pension fund refunding bonds structured as Series B and C and senior managed by Morgan Stanley.

Elsewhere in the region, the Illinois State Toll Highway Authority is planning $350 million of revenue refunding bonds on Thursday.

Bank of America Merrill Lynch will price the offering with ratings of Aa3 from Moody’s and AA-minus from both Standard & Poor’s and Fitch. The maturity structure was not available by press time.

In the meantime, the Northeast market won’t have a shortage of offerings to choose from as a pair of highly recognizable credits will issue fairly sizable offerings this week.

New York City is slated to sell $780 million of taxable general obligation BABs and $20 million of tax-exempt GOs on Wednesday in a negotiated deal senior-managed by Morgan Stanley. The city’s GO debt is rated Aa2 by Moody’s, and AA by Standard & Poor’s and Fitch.

Connecticut will market $600 million of new-money and refunding GOs in a JPMorgan-led deal scheduled for pricing Wednesday on the heels of a downgrade last week from Fitch.

Citing reduced financial flexibility and a heavy reliance on debt to close operating gaps, Fitch downgraded $13.7 billion of outstanding GOs from the nation’s wealthiest state to AA from AA-plus, adding that it has been affected by recession-related weakness.

Fitch rates the new bonds AA, and revised its outlook to stable from negative.

Despite the downgrade, Cumberland’s Mousseau said Connecticut should find eager buyers.

“Yes, there was a downgrade, but in a world fraught with oil slick problems, European problems, and an ugly stock market, the state of Connecticut looks pretty good — especially when compared with its tri-state neighbors,” he said.

Connecticut’s upcoming sale consists of $400 million of refunding GOs in Series C and $200 million of new-money bonds in Series B. Moody’s rates the state GOs Aa2, while Standard & Poor’s rates it AA. Both agencies give stable outlooks.

Looking to the Southwest, the Tarrant County, Tex., Cultural Education Facilities Financing Corp. will bring $350 million of hospital revenue bonds to market today on behalf of Scott & White Healthcare.

Rated A1 by Moody’s, A by Standard & Poor’s, and AA-minus by Fitch, the deal is structured as serial bonds maturing 2011 to 2025, and term bonds in 2030, 2035, 2040, and 2045, which are subject to mandatory sinking funds.

Proceeds will finance the construction of a 140-bed acute-care hospital and the conversion of a 150-bed general acute-care hospital into a children’s hospital, as well as expansion of existing facilities.

In the competitive market, meanwhile, the San Francisco Public Utilities Commission is gearing up to sell a total of $484 million of water revenue debt in a three-pronged deal planned for Wednesday.

The offering consists of $380.2 million of taxable water revenue bonds due in 2011 and two series of tax-exempt water revenue bonds totaling $103.5 million, also maturing in 2011.

Denver will round out the competitive activity on Wednesday when it issues $349.9 million of GO debt divided into $312 million of taxable GOs maturing from 2017 to 2030, and $37.9 million of tax-exempt GOs maturing from 2011 to 2016.

There was some rollover demand sustaining mostly subdued new-issue activity in the abbreviated municipal market last week following the Memorial Day holiday.

There was slight weakness toward the end of the week and the secondary market was extremely quiet, according to traders. The Treasury market posted some losses mid-week and toward the end of the week as well.

The generic triple-A GO bond due in 30 years ended at a 3.99% yield at the close of trading on Friday, compared with the 4.01% it ended at last Thursday and the 4% it ended at on May 28, the prior week, according to Municipal Market Data.

A $598.1 million GO offering from the Metropolitan Government of Nashville and Davidson County was one of the largest deals priced toward the end of the week.

Its $300 million BAB portion contained the longest maturity of the deal. The 2034 maturity was priced at par with a 5.70% yield, or 3.71% after the 35% federal subsidy, and 145 basis points over the comparable Treasury.


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